Improving Tax Credits for New Mothers and Reducing Marriage Penalties for Low-Income Americans

April 2, 2014 10:00 AM

Signed into law in 1975, the Earned Income Tax Credit was designed to offset regressive payroll taxes, supplement low wages, and reward hard work. The EITC has been strengthened several times by administrations on both sides of the political divide and is now considered one of the federal government’s largest and most effective anti-poverty programs. Currently, the EITC is the subject of many discussions on Capitol Hill as the national economy continues its sluggish growth and the wage gap continues to widen.

Last week, the Institute for Women’s Policy Research (IWPR) hosted a policy briefing, Improving Tax Credits for New Mothers and Reducing Marriage Penalties for Low-Income Americans. The panel opened with several remarks by Congressman Thomas Petri (D-WI), who is the sponsor of the Making Work and Marriage Pay Act of 2013. Panelists included Elaine Maag, Senior Research Associate, Urban Institute; Isabel Sawhill, former President of APPAM and Co-Director of the Center on Children and Families and Senior Fellow, Brookings Institution; Robert Cherry, Professor of Economics at Brooklyn College, City University of New York; and Shawn Fremstad, Senior Research Associate at the Center for Economic and Policy Research. The panel was moderated by Heidi Hartmann, President of IWPR.

Congressman Petri shared several statistics about the EITC, including that a co-habitating couple with children actually lose $7,000 in credit if they marry. This perceived “marriage penalty” is of concern to policymakers, who are in the process of addressing the issue. “The EITC is an effective tool and important resource for eligible families with children,” said Petri, “workers not raising dependent children receive minimal assistance from it.” Petri hopes to find an effective policy that keeps government funding the same—effectively “budget neutral”—but rearranges the benefits to better serve everyone eligible for the program.

Hartmann concurred. “By looking at all ways to improve the EITC, the well-being of women and single mothers will be better served.” She noted that today’s working women have reduced their time at home after the birth of a child to only three to four weeks before returning to the workforce.

The policy proposal put forward by Maag noted that currently, 97 percent of EITC benefits go to families with children. “For a single parent with two children, benefits rise rapidly before falling dramatically once income exceeds about $22,000—which is just above the 2013 poverty guideline for a family of three ($19,530),” she said. “This can make it difficult for families as they try to move out of poverty—just as they earn a little more money, they lose the benefits that helped give them a leg up.” Her suggested policy corrections included making the EITC scaled to an individual worker credit not based on children in the household. What is ultimately key to fixing the problem, said Maag, is “understanding how child-focused credits fit together—or don’t—and recognizing who benefits from them is a good starting point for lawmakers seeking to reform the tax code with fairness and efficiency in mind.”

Sawhill noted that the proposal put forward by Quentin Karpilov and herself not only advocates adjusting the EITC but also includes raising the minimum wage. “A better way to boost earnings is to combine the best elements of each policy, allowing them to work in tandem to reduce poverty and inequality,” she said. Their proposal included five key points: raising the minimum wage to the currently proposed $10.10 and indexing it to inflation, provide a more generous EITC to families with young children, provide a significant benefit to childless workers, base the credits on personal instead of family income, and restricting eligibility for childless workers and second earners to households below 200 percent of the federal poverty line.

Cherry discussed his New Mother Tax Relief proposal, which presents an alternative EITC schedule for families with one qualifying preschool-age child. It also proves a more generous EITC for these families through raising the income level when the phasing-out of benefits begins, and lowering the phase-out rates to six percent for married couples and 12 percent for head-of-household families. “By providing these needed funds to lower middle class married families and reducing the marriage penalty,” he said, “the proposal is both pro-family and pro-marriage.” He indicated that the proposal is well targeted, as the majority of new benefits only go to near-poor head-of-household families and married couples with modest income. “It also has the added benefit of not increasing the complexity of filing taxes, as all families will simply need to choose which EITC schedule they are using—the current one or the new one, depending of if they have a qualifying preschool-age child.”

Fremstad, as the panel’s discussant, noted that by using child age brackets comes with a large assumption about child development. “Does income have a bigger impact on child development?” he asked, noting a recent study in the United Kingdom on the subject that indicated he does. “There’s not a clear consensus yet on what the most effective age is for a child in their development, however, and that has an impact on what benefits—pre-K, preschool, childcare, etc.—can best be targeted for increase.”

He also pointed out regarding policies requiring varying levels of work hours don’t indicate if they’re dependent on self-verification, employer reporting, or some other form of accountability. “And what I don’t’ see addressed is those with disabilities; this segment of the working poor is important with regards to labor market outcomes,” he said. “There is argument for a supplemental credit, similar to the Supplemental Security Income available for children with disabilities, that could fall under the childless worker category.”